Summary:

In the real estate transactional business, the lender’s role in obtaining insurance is crucial, integral, and empowering.  The lender’s responsibility to ensure the property is adequately insured as a condition of the closing cannot be overstated.

The lender’s role in ensuring the property is adequately insured as a condition of the closing is not just a responsibility; it’s a testament to their unwavering commitment and value in the real estate transactional business.  Their proactive approach to these responsibilities should instill confidence in all parties involved, knowing that the lender is always one step ahead.

During the escrow period, the seemingly routine process of issuing a binder of coverage carries potential risks that should not be overlooked.  The insurance broker or insurer issues this notice to both the escrow holder and the property lender. The escrow holder, typically a neutral third party responsible for facilitating the transaction, is crucial in ensuring that all necessary documents, including the insurance binder, are in place before closing. They play a vital role in verifying the authenticity of insurance documents and ensuring that all parties are adequately protected.

The lender will require an insurance broker or company to add them as an additional named insured on the binder page or face sheet.

As a fully enforceable document, the insurance binder provides secure temporary insurance coverage, giving all parties a sense of reassurance and peace of mind...

Three to four weeks after closing, the entire policy will be delivered to the property owner’s location, and a copy will be sent to the lender.

Imagine you were the lender and discovered that the insurance broker had issued the binder policy fraudulently. The transaction closed escrow, but the insurance company declined coverage.  In such situations, immediate action is not only necessary but also crucial. It empowers you to control and mitigate potential losses.

Article:

The pivotal moment in this case was when the insurance agent, entrusted with ensuring the property was adequately insured, issued a falsified insurance binder.  This document, stating that the property was covered, was issued while the carrier drafted the insurance policy.

The reality is that the insurance company has declined the coverage.  Still, the agent responsible for ensuring the property was adequately insured withheld this material information, which would have triggered a default, and the lender would have placed a forced-order insurance policy on the property.

When the lender audited their file 60 days after closing, a commendable practice, they discovered that no original insurance policy had been received.  The lender’s proactive approach led them to contact the insurance company, only to find that it had initially declined coverage. There had been no coverage from the loan’s closing until the audit was conducted.  The agent attempted to conceal his fraud by claiming that the insurance company had declined coverage due to the lender’s harassment; however, the lender’s unwavering vigilance had already uncovered the truth.

The lender immediately took action to protect their interests. They placed a forced-order insurance policy on the property to provide coverage and notified the Borrower that they had violated a loan covenant by not having coverage.  This was not just a breach of contract but a material default that had significant consequences for the lender.  The lender’s swift and decisive action in rectifying the situation should reassure all parties involved, demonstrating the lender’s commitment to protecting their interests.

The Borrower eventually obtained insurance, but the cost and wasted time were not worth having the loan on the lender’s books.  This incident serves as a stark reminder of the severe financial implications of such actions, particularly when hundreds or thousands of loans are on the lender’s books.  The Borrower’s actions resulted in increased costs, wasted time, and damaged their relationship with the lender, potentially affecting their future borrowing opportunities.  This serves as a sobering reminder of the potential consequences of such actions.